6 rules for being your own best financial adviser

Commentary: Show your money you care about it

BOSTON (MarketWatch) — No one wants more for your money than you. But are your savings and investing plans working against you?

That’s a big question in the financial-services world nowadays because of the ongoing battle over the fiduciary standard. That’s the rule saying financial advisers — who get paid for their advice or counsel — must put the client’s best interests first, whereas a broker (who sells specific investment products) must only provide suggestions that are “suitable.”

Mutual-fund companies should be fiduciaries too, says Vanguard Group founder Jack Bogle. At the John C. Bogle Legacy Forum, hosted by Bloomberg Link at the Museum of American Finance in New York last week, Bogle said Vanguard’s mantra of keeping fees low is in the consumer’s best interest. He bluntly noted that the only thing preventing other fund firms from acting the same is “the profit motive.”

Personal profit motives obviously drive the investment decisions of individuals, but so do emotions, habits, knowledge and more. When you consider the responsibilities that a fiduciary has to their clients and apply them to individuals, it’s clear that plenty of people don’t act like a fiduciary when they run their own portfolio. They’re acting in ways that are counter to their best interests.

Consider the six key fiduciary duties that are requirements of the Securities and Exchange Commission’s Advisers Act of 1940, the rule requiring investment advisers to “serve the best interest of its clients.”

Recognize what it means if you falling short on these tasks as they apply to individuals; you might care for your money more than anyone else, but you have to give it the utmost level of concern and protection.

1. Serve the client’s best interest

For advisers, this is about conflicts of interest; for consumers, the conflict is the emotions that often are at odds with the strategy they’re pursuing.

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That’s why individuals must recognize — and reckon with — their own investment temperament. If they’re prepared to invest for the long haul, they should focus on building an appropriate asset-allocation plan. They should then spend the rest of their lives trying to avoid the conflicts of interest, the times when market noise gets loud and makes them want to deviate from the plan to do what feels good at the moment.

Even without a long-term disposition, an investor needs to set up a strategy that won’t waver every time there’s a market surge or decline.

2. Act in utmost good faith

For advisers, this is about being honest and honorable; for individuals, it’s about making money in a fashion that is fair and reasonable.

When individual investors start to factor the misery of others into their decisions — when they feel they can profit because someone else is stupid — they’re acting like a lot of money-management firms, but they’ve stopped acting like a fiduciary.

3. Act prudently, with the care, skill and judgment of a professional

Advisers live by the “prudent man standard” — the question of whether a prudent person would take the actions being suggested for their clients; individual investors must act like that proverbial prudent man.

According to the Institute for the Fiduciary Standard: “A prudent process requires investigating and assessing an investment’s characteristics — not just performance — based on objective and quantifiable data.” Investors who fail to include independent research into their investment decisions — who act on hot tips, media recommendations, or gut instincts without more due diligence — have left their best interests behind.

4.Avoid conflicts of interest

Advisers can’t eliminate all of their conflicts of interest; neither can individual investors. There will always be forces and emotions that have the potential to work at odds with long-term goals and objectives. Avoiding and minimizing those issues is essential for acting in your own best interests.

5.Disclose all material facts

Advisers must make sure clients know all the facts and circumstances they’re facing; for individuals, this means educating themselves on the fine print — expenses, compensation, fees and other issues related to the investments they own. It means delving into the paperwork and doing the little things that most investors hate doing.

If you’re not looking at investment statements, prospectuses and other documents that are part of the “material facts,” you’re not acting in your own best interests.

6.Control investment expenses

Bogle likes to say: “The investor gets what he doesn’t pay for.” Every dollar that doesn’t go to pay expenses is one that stays in an investor’s pocket. Before accepting higher expenses, make sure there’s a reason to believe that you will get what you pay for — something better than you might expect from a lower-cost alternative — and that you’re not simply paying for what you get. See a related column on Bogle’s investment advice.

Being your own fiduciary isn’t easy, but if you believe you are the best person to take care of your money, you have to act like it.

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